Huy Kien Luu v Deputy Commissioner of Taxation

[1997] FCA 402

CATCHWORDS

TAXATION - amended assessments of taxation - relevant considerations - whether the conduct of officers of the Australian Taxation Office was a relevant issue for consideration by the trial judge in assessing amended assessments of taxation.

Tax Administration Act 1953 (Cth), s 14ZZP

Devries v Australian National Railways Commission (1992) 177 CLR 472

HUY KIEN LUU & ANOR v DEPUTY COMMISSIONER OF TAXATION
SG 10 of 1997

SPENDER, SACKVILLE, and FINN JJ
SYDNEY (heard in Adelaide)
23 MAY 1997

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIAN DISTRICT REGISTRY  No      SG 10 of 1997

GENERAL DIVISION

ON APPEAL FROM A JUDGE OF THIS COURT

BETWEEN:HUY KIEN LUU and MO DUNG LUU

Appellants

AND:DEPUTY COMMISSIONER OF TAXATION

Respondent

CORAM:                   SPENDER, SACKVILLE and FINN JJ
PLACE:  SYDNEY (heard in Adelaide)
DATE:  23 MAY 1997

MINUTES OF ORDER

THE COURT ORDERS THAT:

The appeal be dismissed with costs, to be taxed if not agreed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIAN DISTRICT REGISTRY  No      SG 10 of 1997

GENERAL DIVISION

ON APPEAL FROM A JUDGE OF THIS COURT

BETWEEN:HUY KIEN LUU and MO DUNG LUU

Appellants

AND: DEPUTY COMMISSIONER OF TAXATION

Respondent

CORAM:                   SPENDER, SACKVILLE and FINN JJ
PLACE:  SYDNEY (heard in Adelaide)
DATE:  23 MAY 1997

REASONS FOR JUDGMENT

This is an appeal from orders made by a judge of this Court (Mansfield J) on 24 January 1997 pursuant to s 14ZZP of the Tax Administration Act 1953 (Cth), confirming amended assessments of taxation issued by the respondent (‘the Commissioner’) on 24 October 1994 to Huy Kien Luu (‘Mr Luu’) for the taxation year ending 30 June 1994, and varying amended assessments of taxation each issued by the Commissioner on 11 November 1994 to Mo Dung Luu (‘Ms Luu’) for each of the taxation years ending 30 June 1989, 30 June 1991, and 30 June 1992, the assessments being amended by reducing the amounts of taxable income in each of those years.

His Honour set aside amended assessments for the taxation years ending 30 June 1989 and 30 June 1990 issued to Mr Luu, and an amended assessment for the taxation year ending 30 June 1988 to Ms Luu, in each case on the basis that there was no income omitted by the relevant taxpayer in the taxation return submitted for each of those years.

There is no cross appeal by the Commissioner from those orders setting aside those amended assessments.

There is no dispute about the background facts, which are adopted from the trial judge’s reasons for judgment.

Mr Luu and Ms Luu are brother and sister.  Mr Luu was born on or about 13 March 1967 and Ms Luu on 7 September 1952.  They, as part of a larger family group including their parents, left Vietnam in late 1978 or early 1979 and arrived in Malaysia.  They resided in a transit camp in Malaysia for some months.  They applied to Australian authorities for, and were granted, refugee status.  They arrived in Australia on 11 October 1979 and were immediately granted permanent residence.  They have lived in Australia ever since.

In Vietnam, the appellants’ parents Mr Vinh Luu and Ms Ngoc Yen Phuong had a family business involving milling and food wholesaling.  It was a successful and profitable enterprise, until about the mid 1970s when the South Vietnamese government collapsed.  It had enabled their parents to accumulate some wealth, but the trial judge found that it was not possible on the evidence before him to decide to what extent.  The victimisation of Mr Vinh Luu and the family by the new Vietnamese government led to their decision to come to Australia.

Mr Luu from an early age worked casually as a cleaner in restaurants and as a gardener.  From about 1985 he worked full time in restaurants, as a cleaner, kitchen hand and later as a chef.  The Commissioner has a record of him first having lodged a taxation return for the year ending 30 June 1987.

Ms Luu suffered quite severely from a childhood illness of polio.  Her income from the time the family arrived in Australia until 1989 was from either sickness benefits, unemployment benefits or rehabilitation benefits, under the Social Security Act in force from time to time.  She supplemented that income by casual dress designing and dress making for friends and acquaintances.  She first lodged an income tax return for the year of income ended 30 June 1989.

In about January 1989, Mr Luu and Ms Luu commenced to operate a restaurant business known as the Tandoor Shalimar Restaurant and continue to do so.  Associated with that activity, they operated also an Asian food outlet in the University of Adelaide from 1989 to 1994.

From 1983, Mr Luu and Ms Luu lived with their parents at 10 Hammond Road, Findon (‘the Hammond Road property’), purchased for $83,000.00 said to be with funds from their parents’ resources but at the time put into the names of two of their brothers Mr Dan Kien Luu and Mr Lac Kien Luu.  Both the appellants’ parents are now deceased, Mr Vinh Luu in February 1995 and Ms Ngoc Yen Phuong in September 1994.

Mr Luu claimed he was earning more than was declared on group certificates issued to him for the 1987-89 tax years.  There was a dramatic drop in profits for the 1990-91 tax year, although the declared gross revenue for each of 1990, 1991 and 1992 did not vary greatly.  It was submitted on behalf of the Commissioner before the trial judge that:

“  It is the Commissioner’s view that that drop reflects in some way the inappropriate withdrawal of funds from the business operations before declaring the partnership income, and those withdrawn funds were used to finance asset acquisitions during that year.”

In August 1992 the Commissioner commenced an audit return of the tax affairs of Mr and Ms Luu.  The information sought included their personal living expenses.

By letter dated 22 December 1993, the Commissioner gave notice of proposed betterment assessments allowing for living expenses adjusted by having regard to the Australian Bureau of Statistics information.

The proposed asset betterment statements for Mr Luu showed an increase in net assets from $60,061.00 at June 1987 to $283,646.00 at June 1992, while his liabilities did not greatly increase.  In the case of Ms Luu, the change in assets was said to be from $2,364.00 in June 1987 to $216,787.00 in June 1992.  Her liabilities over that period were only for mortgage loans, a mortgage of $44,858.00 at June 1988 for a property at 78 Barker Road, Flinders Park being paid out in full by June 1992; a mortgage of $7,150.00 at June 1989 for the business reduced to $1,416.00 by June 1992, and a mortgage loan of $14,458.00 as at June 1991 for a property at 213 Grange Road, Findon.

In each case the net asset  increase in each year was adjusted to allow for private expenditure of $11,609.00 in 1987-88 (and increased slightly for each subsequent year), interest on borrowings not otherwise brought to account, taxable income declared, and lesser monetary items, to reach the proposed omitted income.  Schedules were provided to show the calculations.

The substantial issues arising from the proposed assessment confronting Mr Luu were the source of funds for the assets acquired, their value or cost (if contested), and the legitimacy of the private expenditure figure.  It was accepted by him that the assets were not acquired from disclosed income in the year of acquisition of each of the assets.  The evidence on behalf of the appellants is that those assets were each acquired from funds (apart from borrowed funds) provided by his parents and representing a mix of moneys from moneys held by them on his behalf (as his practice had been to hand over any earnings to be held by them), from their personal moneys, and from moneys generated by the private sale of diamonds which had been brought from Vietnam to them by acquaintances.

Both Ms Luu and Mr Luu said they were each supported by their parents who paid for all food and outgoings on the family home, and that they lived very frugally.  Ms Luu said that her available cash resources included both $US6000.00 brought with her from Vietnam, and moneys repaid to her by an acquaintance who visited Adelaide and to whom she had made certain cash loans whilst in the transit camp in Malaysia in 1979.

Accountants then acting for the appellants made responses to the Commissioner: it was asserted for their clients by letter of 17 January 1994 that the source of funds to increase assets was not income, and that those funds were from cash savings of Mr Luu of $60,000.00 and Ms Luu of $50,000.00 saved between 1979 and 1987, plus their parents’ support by proceeds of realisation of jewellery, plus support from the Vietnamese community which was said to “have a system whereby support is given when members of the community are wanting funds for real estate”.  It was also asserted that the personal spending was each in the order of $40.00 per week.  By further letter of 31 May 1994 the accountants submitted to the Commissioner their clients’ version of asset betterment statements, which were said to “reflect their positions, without disclosure of moneys borrowed from community arrangements”.  It indicated that each of Mr Luu and Ms Luu would accept amended assessments to “avoid disclosing these arrangements and being seen to betray the trust of other community members”.

The trial judge noted as significant that, apart from the initial cash resource of $72,000.00, the proposed asset betterment statement put forward by Mr Luu did not identify any source of funds from his parents, either of his own money or from their savings or from realisation of jewellery in any of the years in question.  The only external inflow of funds was said to be a gift of $10,000.00 from Ms Luu during 1992.  The gift of $10,000.00 to Mr Luu in 1992 was disavowed by Ms Luu in her oral evidence at trial.  In the case of Ms Luu, the trial judge noted as significant that Ms Luu was prepared to submit to betterment assessments on the basis that there was an unaccounted increase in her net assets of $116,281.00, but also with the same additional cash availability.  It was not then suggested that the source of those funds was non-taxable money received from her parents from the sale of jewellery, from her savings held by them on her behalf, or from their own money.

The Commissioner on 27 October 1994 in the case of Mr Luu and 11 November 1994 in the case of Ms Luu, issued amended assessments for Mr Luu for the tax years ending 30 June 1989 to 30 June 1992 and for Ms Luu for the tax years ending 30 June 1988 to 30 June 1992, with penalty tax in each case at 40% flat, interest at 14.026% to 30 June 1992 and 10% from 1 July 1992 to 16 August 1994.

Both appellants objected to the assessments on 2 December 1994 and the objections were disallowed on 3 August 1995.

Before the trial judge, each appellant, quite inconsistently with what had been advanced by their accountants on 31 May 1994, asserted that the build up of their assets was from funds within the family resources and was not indicative to any extent of non-declared taxable income.

The trial judge said of the reliability of the appellants:

“  For reasons which are common to each, I have reached the same view with respect to each, namely that whilst I think that the general family financing arrangements were as they each have described - that is that their parents ran the family finances and helped each of them out to the extent they could - I reject the proposition that all the funds used to generate the asset growth were from such sources.”

The trial judge referred to the inconsistent explanation for the source of funds underpinning the asset growth.  His Honour rejected Mr Luu’s evidence of earnings in excess of those declared in his group certificates.  He found the explanation for the dramatic downturn in the appellant’s business affairs, namely, the illness of Ms Luu, as unsatisfactory.  In what might be regarded as a sympathetic conclusion, his Honour expressed the view:

“  I do not think either Mr Luu or Ms Luu were attempting to be untruthful in their evidence.”

and said:

“  The result is that, whilst I reject the case as presented by the appellants, I find the broad features of their family financial arrangements and of their activities are made out.”

In the result, the trial judge said:

“  However, my conclusion overall is that the assessments are based upon reliable information as to the asset growth, both as its time and value, and that subject to the personal expenses of Ms Luu they also reflect a realistic picture of the application of available funds for private expenses and non-deductible losses.  Plainly, in respect of both Mr Luu and Ms Luu there is substantial asset growth which remains unexplained except on the basis of undisclosed taxable income.  If, in reaching the conclusions set out below in the light of those general findings, the appellants feel that I have insufficiently reflected the funds available to them from their own savings or from their parents resources, or in the case of Ms Luu I have insufficiently cut back the figure for her personal expenditure, they will have to recognise that such findings are made on the evidence before me and in the light of the weight which I have decided I can give to that evidence.”

The trial judge found:

“  The taxable income of Mr Luu for [1989 and 1990] was the amount disclosed by him in his taxation returns.

In respect of the years ending 30 June 1991 and 30 June 1992, I am not satisfied that those assessments are excessive.

I have also considered the basis upon which the Commissioner imposed additional tax for those years, for interest under s 170AA of the Income Tax Assessment Act 1936 and for penalties under s 223 of that Act including the exercise of his discretion to remit part of the additional tax under s 227(3) of that Act having regard to Taxation Ruling No. IT 2517. I see no reason to interfere with his decision in that regard.

...

In the case of Ms Luu, I conclude in respect of each of the financial years ended 30 June 1988, 30 June 1989, 30 June 1991 and 30 June 1992 that the taxation assessments issued on 11 November 1994 are excessive.  I think that, given her illness, the support given to her by her parents was probably of greater order than that given to Mr Luu, but her capacity to save from her own resources was of course more restricted.  In respect of the year ended 30 June 1988, I conclude that her asset growth was funded from non-income resources available to her, represented by her savings including from realised jewellery and contributions from her parents.  Accordingly, I vary the assessment made on 11 November 1994 by determining that there is no omitted income in respect of that year.”

In respect of the 1989 tax year, the trial judge found that the asset growth was funded to some extent from non-income sources available to her, and allowed for personal expenses at a considerably lower figure than that fixed by the Commissioner.  He concluded that $29,396.00 was the amount of omitted income for the 1989 tax year.  A similar reduction in private expenditure was the sole basis on which his Honour found the assessments for Ms Luu for the tax year ending 30 June 1991 and the tax year ending 30 June 1992 to be excessive.  The trial judge then made orders reflecting the findings to which reference has been made above.

The appellants, who appeared for themselves at first instance, relied on three grounds in their appeal.

The first was that the death of the appellants’ parents was caused by the actions of officers of the Australian Taxation Office, and that the trial judge gave insufficient weight to this factor.  The second was that the actions, including the aggressive attitude of officers of the Australian Taxation Office, had caused depression and mental illness to Ms Luu, suffering as she was from her physical handicap, and the trial judge had failed to have regard to the significance of this conduct on the part of officers of the Australian Taxation Office.  The third ground of appeal alleges, without any particularisation, that the trial judge erred in law and fact with respect to the findings and orders concerning Mr Luu for the tax years ending 30 June 1991, 30 June 1992, and concerning Ms Luu for the tax years ending 30 June 1989, 30 June 1991 and 30 June 1992, asserting that no moneys were owing in respect of any of those years.

Concerning the first two grounds, the trial judge referred to the fact that Ms Luu had suffered quite severely since childhood from polio.  He rejected the illnesses of Ms Luu in 1991 as an explanation for the business turn-around in that year.  He thought that because of her illness the support given by her parents was greater than that given to Mr Luu.  In the context of these two grounds, the trial judge said:

“  Both Mr Luu and Ms Luu put forcibly that their parents, but especially their mother, should have been approached by the officers of the Commissioner to confirm their assertion as to the source of the funds, and for the Commissioner it was urged that they could have procured from their parents such supporting material.  I do not, in the end, think that the fact that there was no information procured from the parents influences my judgment on the facts either way.  I accept that both Mr Luu and Ms Luu felt that it was not their place to require their parents to provide such information.  Nor does the fact that the officers of the Commissioner did not seek information directly from them colour my conclusions in any way adversely to the Commissioner.  There is simply a lack of information when information might have been available.

It is obvious from the way that Mr Luu and Ms Luu gave evidence, and from correspondence tendered, that they are each generally critical of the officers of the Commissioner in the processes of the investigation into their affairs.  The Court did not hear evidence into that conduct; it was not relevant to the appeal.  But, whatever the perception of Mr Luu and Ms Luu, it is fair to say that on the material put before the Court on this appeal there is no objective basis for such criticism.  However, it is obviously a genuinely and deeply felt belief on the part of Mr Luu and Ms Luu that those officers behaved aggressively and unfairly towards them.  One can speculate about possible reasons why such belief came to be formed, albeit in truth (on the evidence before me on this appeal) misconceived.”

His Honour found that this misconceived belief coloured their evidence, and was the explanation for their aggressive, argumentative and at times unresponsive manner.

The reasons for judgment reveal the trial judge approached the complaints by the appellants sensitively and with compassion.  However, at the end of the day, these concerns were and are irrelevant to the issues that the trial judge was called upon to determine.  The issue before the trial judge was whether either of the appellants had discharged the onus they bore pursuant to s 14ZZO of the Tax Administration Act 1953 to show that the amended assessments were excessive.

As to the claims of errors of fact and of law, the trial judge had the inestimable advantage of seeing and hearing the witnesses.  His findings display a nice differentiation of resolution of the various issues between the two appellants, and between the respective tax years.

As the High Court (Brennan, Gaudron and McHugh JJ) said in Devries v Australian National Railways Commission (1992) 177 CLR 472 at 478-479:

“  No doubt the inconsistencies between the plaintiff’s out-of-court statements and his evidence at the trial were matters which might make a tribunal of fact hesitate to accept his evidence. But the trial judge had the great advantage of seeing the plaintiff in the witness box over several days.  This gave the trial judge an incomparable advantage over an appellate court in determining what reliability could be placed on the sworn evidence having regard to the out-of-court statements of the plaintiff.”

Their Honours continued:

“  More than once in recent years, this Court has pointed out that a finding of fact by a trial judge, based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against - even strongly against - that finding of fact; (see Brunskill (1985), 59 ALJR 842; 62 ALR 53; Jones v Hyde (1989), 63 ALJR 349; 85 ALR 23; Abalos v Australian Postal Commission (1990), 171 CLR 167).  If the trial judge’s finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge ‘has failed to use or has palpably misused his advantage’ (S S Hontestroom v Sagaporack, [1927] AC 37, at p 47) or has acted on evidence which was ‘inconsistent with facts incontrovertibly established by the evidence’ or which was ‘glaringly improbable’ (Brunskill (1985), 59 ALJR, at p 844; 62 ALR at p. 57).”

On the appeal, in amplification of the grounds of appeal, it was submitted by the appellants that their accountants had made errors in relation to the figures for the restaurant business and the food business at the university, that the university figures were further skewed by some students being paid in food rather than by way of wages, thus distorting the cost of sales figures in relevant respects, and that the businesses did not have the capacity to generate the degree of income to explain the asset growth in the various years.  None of these matters alter the fundamental issue of whether the appellants had discharged the onus of establishing that the assessments were, in the relevant years, excessive.  The finding by the trial judge that:

“  ...there is substantial asset growth which remains unexplained except on the basis of undisclosed taxable income.”

remains unimpeached. 

No error has been shown with respect to his findings of fact or law, and his Honour’s decision not to interfere with the basis of the penalty tax imposed and with interest has not been shown to be wrong.

The appeal should be dismissed with costs, to be taxed if not agreed.

I certify that this and the preceding  (13) pages are a true copy of the reasons for judgment herein of the Court.

Associate

Date: 23 May 1997

The appellants appeared in person.

Counsel for the respondent     :          Mr S Cole

instructed by  :          Australian Government Solicitor

Date of hearing  :          9 May 1997